By Simon Zekaria and Ian Walker

LONDON--The U.K.'s communications regulator said Tuesday it is pressing ahead with its order for BT Group PLC (BT.A.LN) to run its lucrative infrastructure arm as a legally separate company within the firm, dealing a blow to the British telecommunications giant.

Ofcom said London-based BT, a 170-year-old former state-run monopoly known as British Telecom, failed to offer voluntary proposals that addressed its competition concerns that BT could favor its retail business by running the Openreach division. Ofcom is now planning to notify European regulators.

BT lays most of the U.K.'s millions of telecoms lines and makes a hefty chunk of its revenue through Openreach by connecting up the country's copper wire and high-speed fiber-optic cable network. For years, and amid mounting tension across the industry, it has faced calls for increased regulatory pressure on the division by rival operators, such as Sky PLC (SKY.LN), Vodafone Group PLC (VOD.LN) and TalkTalk Telecom Group PLC (TALK.LN), which lease the network on a wholesale basis to reach their own customers.

Apart from facing down a row over competition and the provision of services, the U.K. telecoms industry is under pressure from regulators and the U.K. government to build speedier networks across Britain, as part of an infrastructure drive.

In July, Ofcom called on Openreach to be a "distinctcompany" with its own board and greater budget independence. But BT said legal separation would be step too far and disagreed with Ofcom's proposals for Openreach to have its own network assets and staff.

BT said Tuesday it is implementing proposals it put forward, including the appointment of Mike McTighe as chairman of the network business from January. It said it is in talks with Ofcom on two outstanding issues--the reporting line of the Openreach chief executive and the form of legal incorporation.

"We will continue to work with Ofcom to reach a voluntary settlement," it said.

On Tuesday, Ofcom said it plans to notify regulators at the European Commission next year, following a consultation period, of its intention to implement the separation.

"We remain open to BT bridging the gap between its proposal and what is required to address our strong competition concerns," it said.

At 1125 GMT, BT shares were up 1.6% at 356 pence.Citi analyst Simon Weeden said he expected Ofcom and BT to reach a resolution before the proposal is filed in Brussels.

"We expect BT to find a compromise on the CEO reporting line issue and to seek a middle ground on allocation of assets and staff with the new Openreach legal entity and so reach a voluntary agreement before this proposal is filed with the Commission."

TalkTalk shares climbed 4.4% to 164 pence. "While we do not think legal separation goes far enough to deliver the broadband consumers deserve, it is at least a step in the right direction," said CEO Dido Harding.

Ofcom warned it could "return" to its threat of separating BT and Openreach entirely if legal separation didn't provide "sufficient benefits" for the wider telecoms industry.

-Write to Simon Zekaria at simon.zekaria@wsj.com and Ian Walker at ian.walker@wsj.com

(END) Dow Jones Newswires

November 29, 2016 07:29 ET (12:29 GMT)

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